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Why the Gold Rally Is Far From Over

Stocks in this article: GLD PHYS

The deliberately and slowly ever-appreciating Chinese yuan will become fully convertible some day and will rival the yen as a reserve currency. Having recently surpassed Japan by GDP size, China now is the world's second largest economy so it is only normal for the yuan to gain international prominence. But it is the Chinese themselves that have the most at stake in the forex reserve diversification conundrum as they hold $3.18 trillion in forex assets, approximately two-thirds of them dollar-denominated.

A Euro Breakup is (Ultimately) Gold Bullish

The worst-case scenario -- which is not what I am looking for -- is a disorderly euro breakup that could result in a sharp, but temporary, dollar spike as it did in 2008. Since the response to the 2008 crisis was more money-printing, the exchange value of the dollar is unlikely to remain high against sounder currencies with higher real interest rates or hard assets like gold. This suggests that any corrections from present levels are likely to be short lived and will ultimately lead to new highs for the price of gold bullion, likely in most major currencies.

If you are looking for exposure to gold bullion do not buy only gold stocks. Such stocks are stakes in operating companies that are very different from hard assets -- physical bullion is a hedge while mining stocks are leveraged investments.

Furthermore, there are a lot of conspiracy theories about the $72 billion worth of gold held in the SPDR Gold Trust (GLD). Paper claims on gold bullion via swaps, futures and the like are not the same as audited gold bars. While proving conspiracy theories is beyond the scope of this missive, the recent shrinkage to a 2.5% premium of net asset value for the Sprott Physical Gold Trust (PHYS) make the shares of the trust so much more attractive.

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